31.08.202109:38 Forex Analysis & Reviews: Economic recovery in the US could slow down

Euro stabilized after an impressive growth last Friday. Most likely, it will undergo another large jump today.

At the same time, the US stock market soared to all-time highs when dollar weakened amid a wait-and-see attitude of the Federal Reserve. But the situation may turn around since the central bank is monitoring how markets and the economy react to the COVID-19 pandemic, more specifically on whether people actively adhere to social distancing measures.

In any case, Fed members noted that disruptions will persist much longer than expected as problems between supply and demand are damaging industries quite seriously. This will continue to curb growth and keep inflation high.

With regards to employment, many analysts are beginning to think that the US will not be able to return to pre-crisis rates in the near future, so they said it should not be the basis anymore when making decisions. Former Treasury Secretary Lawrence Summers is among those who are in favor of changing this indicator.

Another problem that will slow economic growth is the difficulties in solving fiscal policy. Until now, Republicans and Democrats disagree on what the public debt ceiling should be, which is very troubling because the US Treasury is running out of money and it is likely that after a few weeks, it will no longer be able to fulfill its obligations. The deadlock could also lead to a partial government shutdown as Democrats pledged to tie the public debt ceiling to a vital time-spending bill.

Meanwhile in Europe, the ECB is increasingly talking about plans to wind down the bond purchase program.

ECB member Francois Villeroy de Gallo recently said the central bank should consider the region's more favorable financing conditions when deciding on the pace of emergency bond purchases. He stated that doing so could prevent the inevitable slowdown of economic growth.

Villeroy also added that any changes to the ECB PEPP program has nothing to do with the decisions of the US Federal Reserve, as maintaining its principle of purchasing massive bonds is a way to retain good conditions for economic recovery.

Meanwhile, ECB President Christine Lagarde listed a new program to support the economy. She said it could be introduced immediately after the bond purchase program ends as the Euro area does not have serious inflationary pressure and no rapid growth in the labor market. Current conditions also allow the central bank to maintain a soft policy since it is far from worrying about the consequences that may occur as a result of an overheated economy.

All these comments came ahead of the ECB meeting next week, during which the members will decide how much stimulus the region needs in the remaining months of 2021. The central bank is also yet to spend quite a few billion euros on its 1.85 trillion emergency program ...

With regards to inflation, Destasis reported that Germany observed a rapid growth this August, when the indicator accelerated to its highest level since 2008. CPI is said to have risen to 3.9%, from 3.8% in July. EU-harmonized inflation also jumped to 3.4%, while month-over-month CPI remained unchanged.

Meanwhile, economic confidence fell to 117.5 points in August from 119.0 points in July. Sentiment apparently weakened because of falling confidence in the consumer, service and industrial sectors. Industrial sentiment reportedly dropped to 13.7 points, while consumer confidence slipped to -5.3 points.

As for EUR/USD, a lot depends on 1.1810 because a climb above it could lead to a further rise to 1.1860 and 1.1890. Meanwhile, a drop below the level could result in a plunge to 1.1785, and then to 1.1765 and 1.1740.